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Barack Obama in Havana on March 20, 2016 - the first US president to visit the country in 88 years. (Photo: Pete Souza/The White House)
A joint press conference in Havana with Presidents Barack Obama of the US and Raul Castro of Cuba. (Photo: The White House)
Wednesday, March 23, 2016
Commentary

Cuba After Obama


Cuba needs to implement more reforms to boost foreign investment.

LATINVEX EDITORIAL

US President Barack Obama completed a successful 3-day trip to Cuba this week, capping recent measures to liberalize economic and business relations with the island while re-establishing full diplomatic ties.

We applaud the President’s moves at closer Cuba ties. While the US embargo still impedes full commercial relations between the United States and Cuba, recent measures have clearly brought the two countries closer. US airlines, hotel companies and financial institutions are rushing to set up operations on the Caribbean island. The embargo, which can only be lifted by the US Congress, prohibits normal US travel to Cuba, but recent measures are making it easier for Americans to travel.

Obama’s successor may decide to push for either a full lifting or piecemeal lifting of the 56-year old ban on US trade relations with Cuba. A new CBS News/New York Times poll shows that 55 percent of Americans favor the United States ending its trade embargo against Cuba.

Meanwhile, business groups like the US Chamber of Commerce and the Council of the Americas also favor lifting the embargo.

"There is no better example of the ineffectiveness of U.S. unilateral sanctions than Washington’s policy toward Cuba," the Chamber said in a statement last year. "Implemented in October 1960 to pressure Fidel Castro to democratize, the Cuban embargo arguably has helped prop up the current regime. No one seriously argues that the Cuban dictatorship could have withstood five decades of free trade, free markets, and free enterprise, powered by its own entrepreneurial citizens."
 
It quotes a March 2010 study by Texas A&M University that indicates that easing restrictions on agricultural exports and lifting the travel ban could result in up to $365 million in additional sales of U.S. goods and create 6,000 new jobs in the United States.

“We have worked for years for greater engagement between our two countries, and we applaud the administration’s commitment to continuing these reform efforts,” Susan Segal, the President and CEO of the Americas Society/Council of the Americas, said in a statement this month after the latest reforms by the Obama Administration.

“These latest changes, taken together with the previous rounds of amendments, continue to chip away at our outdated embargo toward Cuba,” added AS/COA Director of Policy and Head of the Cuba Working Group Alana Tummino.

CUBA REFORMS

Now the time has come for Cuba to respond in kind. Despite several economic reforms implemented by President Raul Castro, Cuba remains the most repressed economy in Latin America, according to the latest Index of Economic Freedom from The Wall Street Journal and the Heritage Foundation. Globally, Cuba ranks as the second-worst country out of 178 nations.

“Much-touted “free-market reforms” have largely involved only cosmetic changes,” Heritage says. “The country’s centrally planned economy is a significant barrier to the free flow of international trade and investment. The financial sector remains heavily regulated and controlled by the state.”

Cuba’s economy is 29 percent free. That compares with Chile and Colombia, which are 79 and 72 percent free, respectively. The Dominican Republic, a country that Cuba is often compared with to measure future potential, is 60 percent free.

Many experts believe Castro views China and Vietnam as role models for combining a one-party repressive political system with economic liberalization. However, even China and Vietnam have significantly more open economies than Cuba. Vietnam’s economy is 54 percent free (and in trade freedom it is 83 percent free). China comes close behind, with 52 percent economic freedom and 73 percent trade freedom.

So clearly, Cuba needs to implement more reforms to make its economy attractive for foreign investors. Even today, companies from Europe (that are not impacted by the US embargo against Cuba) have been reluctant to invest on the island due to its weak investment climate.

Cuba can boost foreign investment quickly by implementing a combination of reforms. They include guaranteeing respect for private and foreign investments (the current investment law allows for the state to overrule any foreign investment contract), stop the dual exchange rate system (which the government has said it plans to do this year), let foreign companies hire employees directly instead of going through the state (which typically keeps a significant portion of the salary), grant Cuban private companies the right to form partnerships with foreign investors (currently only state companies can do so), grant foreign companies that operate independently of any joint ventures with the state to have the same tax benefits as state JVs, and last, but not least, allow international arbitration of disputes (currently only Cuban state-controlled courts can handle any disputes).

These measures can be taken immediately – independent of whether the US lifts the embargo or not – and would result in a surge of non-US investments as well as even stronger interest from US companies.

The ball is in your court, Mr. Castro.

 

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